Jordan Ellis
Hospital prices have been a growing concern, with healthcare prices in the US being deemed excessive when compared to other countries. This has been attributed to consolidation through mergers and acquisitions, which has increased providers' market power and allowed them to negotiate higher prices. To address this issue, various strategies have been proposed, including regulating prices directly in concentrated provider markets and promoting competition. Additionally, there has been a push for universal health coverage in low- and middle-income countries, with China significantly expanding its health insurance coverage. While China has also implemented reforms to control cost escalation, challenges remain due to the coping strategies of suppliers. This complex issue requires a range of solutions, and it is important to explore these options to ensure accessible and affordable healthcare.
| Characteristics | Values |
|---|---|
| Excessive healthcare prices | $230-$240 billion in wasteful healthcare spending each year (as of 2019) |
| Cause of excessive healthcare prices | Year-over-year increases in the prices of healthcare services, not the number of services provided |
| Cause of price increases | Hospital consolidation through mergers and acquisitions |
| Effect of monopolies | Hospitals that held monopolies charged 15% more than those with four or more competitors |
| Effect of limited competition | Drug manufacturers charge exorbitant prices for drugs |
| Effect of market power | Providers can negotiate higher prices in their contracts with payers |
| Provider "peer comparisons" | Can control unnecessary utilization and motivate high-cost providers to lower their prices |
| Market concentration | As of 2017, approximately 90% of provider markets were highly or "super" concentrated |
| Cost reimbursement | Hospitals are paid retrospectively based on the cost incurred by each patient, leading to a "medical arms race" and escalating healthcare costs |
| Prospective payment systems | Overcome the deficiencies of cost-based reimbursement by introducing incentives for cost control and efficient behaviour |
| Payment by Results (England) | Hospitals are paid a Health Resource Group (HRG) price based on national average costs adjusted by a provider-specific index and market factor forces |
| Regulation challenges | Difficulty in defining a "market," especially when considering geography or provider type, limits the effectiveness of tying regulation to crude measures of concentration |
| Think tank proposals and legislation | Trigger regulatory action to promote competition in targeted markets by measuring provider market shares or the Herfindahl-Hirschman Index (HHI) |
| Universal health coverage | China has expanded health insurance coverage from 29.7% in 2003 to over 90% by the end of 2010, but the cost of healthcare has also been rising rapidly |
| Cost escalation factors | Meeting unmet needs of vulnerable groups, moral hazards associated with demand and supply, rapid increase in household income, and financial incentives for overprovision of expensive services |
| Coping strategies | Pharmaceutical manufacturers may stop producing drugs when faced with reduced prices, and doctors and hospitals may be less likely to use these drugs due to profit concerns |
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What You'll Learn
Regulating hospital prices based on market concentration
There is a general consensus that healthcare prices in the US are excessive when compared to other countries. A Federal Trade Commission report from 2016 found that hospitals with monopolies charged 15% more than those with four or more competitors. Hospitals with limited competition have also been accused of charging exorbitant prices for drugs.
Market consolidation has been linked to higher prices, and regulators are seeking solutions that do not rely on the threat of taking business away from providers or manufacturers. Strategies include lowering the price of a single service, capping the price of a bundle of services, or limiting price growth. Medicare prices are sometimes used as a benchmark, as they are based on the cost of production plus a reasonable profit.
Provider "peer comparisons" can also be used to control unnecessary utilization and motivate high-cost providers to lower their prices. For example, in New Hampshire, evidence of excessive prices enabled the state's largest insurer to negotiate lower prices by branding the hospital as a pricing outlier and garnering public support.
However, regulating hospital prices based solely on market concentration may not effectively target high-priced hospitals. This approach assumes a direct relationship between market structure and profit margins or prices, which may not always hold true. Markets defined narrowly in terms of geography or provider type may appear less competitive than they are in reality. Additionally, some hospitals in "unconcentrated" markets may still possess and exercise market power.
To address these challenges, proposals have been made to trigger regulatory action based on measures of market structure, such as provider market shares or the Herfindahl-Hirschman Index (HHI). For example, the Bipartisan Policy Center's "Bipartisan Rx for America's HealthCare" proposes that hospitals in highly concentrated markets with high HHIs be required to negotiate with the Federal Trade Commission to reduce their HHI or have their prices capped at a percentage of Medicare rates.
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Prospective payment systems
The Prospective Payment System (PPS) is a Medicare payment system that reimburses hospitals at predetermined rates, regardless of the actual costs incurred. This system removes the incentive for hospitals to increase spending as higher costs no longer result in higher reimbursement levels. PPS aims to control the growth of inpatient benefit costs without increasing out-of-pocket expenses for patients.
Medicare bases payments on codes using a classification system for each service, such as diagnosis-related groups for inpatient services and ambulatory payment classifications for outpatient claims. The Acute Care Hospital Inpatient Prospective Payment System (IPPS) is one example of PPS, where hospitals contract with Medicare to deliver acute inpatient care at pre-determined rates. The IPPS covers Medicare patients for 90 days of care per illness episode, with a 60-day lifetime reserve.
Several features were incorporated into PPS to ease the transition from retrospective to prospective payment systems. For example, a hospital-specific portion was included in calculating prospective payment rates to give hospitals time to adjust to fiscal pressures. Additionally, a regional component was considered to account for variations in practice patterns and other factors beyond the hospital's control.
While the literature suggests that PPS has achieved its intended effects on costs and intensity of care, it has yet to conclusively determine its effectiveness and equity as a policy tool for cost containment. Published studies indicate that PPS has not negatively impacted the quality of care or the health of the hospital industry. However, due to data lags, these studies primarily reflect the early period of PPS implementation, and further research is needed to understand its long-term opportunity costs.
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Reducing the power of monopolies
The issue of rising healthcare prices is a pressing concern, and one contributing factor is the power of monopolies in the healthcare sector. Hospitals with market dominance can charge significantly more than those with competitors, as evidenced by a 2016 Federal Trade Commission report. This highlights the importance of reducing the power of monopolies to stem price escalation in hospitals. Here are some strategies to achieve this:
Promote Competition
Encouraging and enabling competition is a key strategy to reduce the power of monopolies. This can be achieved by attracting new market entrants, such as by offering incentives or streamlining the regulatory process for establishing new healthcare providers. Breaking up existing monopolies through regulatory action can also increase competition. For example, the Hospital Competition Act of 2019 (H.R. 506) aims to require hospitals with market shares of 15% or more in highly concentrated markets to accept Medicare rates, thereby reducing their pricing power.
Enhance Price Transparency
Increasing price transparency can empower patients, insurers, and regulators to identify and challenge excessive pricing by monopolistic hospitals. Making pricing information publicly available, as done in New Hampshire, can help shift the balance of power towards insurers and drive negotiations for lower prices. This strategy leverages the influence of public scrutiny and concern over market domination by monopolies.
Regulate Mergers and Acquisitions
Mergers and acquisitions contribute to the consolidation of market power and can lead to higher prices. Federal and state agencies have a role in scrutinizing and, if necessary, blocking or imposing conditions on mergers to prevent the creation or strengthening of monopolies. Monitoring the conduct of dominant healthcare systems post-merger is also important to ensure they do not abuse their market power.
Alternative Payment Systems
Prospective payment systems, such as those used in England and the US, relate payment directly to activity, removing the ability of hospitals to influence prices. These systems introduce incentives for cost control and efficient behaviour, potentially reducing the financial incentives for hospitals to engage in a "medical arms race" by acquiring the latest technologies and facilities.
Direct Price Regulation
In some cases, direct price regulation may be necessary to control monopolistic pricing. Proposals such as the Fair Care Act of 2019 (H.R.) suggest capping prices at a percentage of Medicare Advantage rates for hospitals in highly concentrated markets. While this approach has challenges, such as defining the relevant "market", it can be an effective tool to protect consumers from excessive pricing.
By implementing these strategies, policymakers can reduce the power of monopolies in the healthcare sector, contributing to the broader goal of stemming price escalation in hospitals and making healthcare more accessible and affordable for patients.
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Publicly identifying high-priced providers
Market Competition and Transparency: Publicly disclosing pricing information for healthcare services introduces market competition and transparency. When patients and insurers have access to pricing data, it empowers them to make informed choices and compare providers based on cost. This transparency can motivate high-priced providers to adjust their rates to remain competitive and attract price-conscious consumers.
Shifting Power Dynamics: Making pricing information public can shift the balance of power in the healthcare market. In the case of New Hampshire's most expensive hospital, public awareness of excessive prices enabled the state's largest insurer to brand the hospital as a pricing outlier, gain public support, and successfully negotiate lower prices. This example demonstrates how transparency can weaken the market power of high-charging providers and give insurers more leverage in price negotiations.
Provider Peer Comparisons: Provider peer comparisons, which involve comparing the prices and services of healthcare providers, can also play a role in this strategy. While typically used to control unnecessary utilization, provider peer comparisons can also motivate high-cost providers to lower their prices to remain competitive. This dynamic can be particularly effective when coupled with public awareness and scrutiny of excessive pricing practices.
Regulation and Policy Interventions: Policy interventions and regulatory actions are often necessary to address market failures and anti-competitive practices in the healthcare sector. Federal and state agencies have a role in monitoring mergers and acquisitions to prevent the formation of monopolies or dominant market positions that can lead to higher prices. Additionally, proposals such as the Bipartisan Rx for America's HealthCare and the Hospital Competition Act of 2019 aim to promote competition and regulate prices in targeted markets.
International Context: Addressing price escalation in hospitals is a global concern, with countries like China also grappling with rising healthcare costs. China's transition to universal health coverage and the rapid increase in household income levels have contributed to escalating healthcare costs. While China has implemented policies to regulate drug prices and explore alternative provider payment methods, the complexity of the supply side of the market has sometimes compromised these efforts.
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Improving regulation of drug prices
Drug prices are a significant contributor to rising healthcare costs. In the US, commercial insurance markets are particularly affected by high drug prices. Drug manufacturers have been accused of charging extremely high prices for drugs when competition is limited. Studies show that the prices of brand-name drugs decrease to nearly half their original cost after two generic alternatives enter the market, and to a third of their original cost once five generics are available.
To improve the regulation of drug prices, policymakers can consider the following strategies:
- Promote competition in the pharmaceutical market: Encouraging the development and entry of generic drugs can help drive down prices. Policymakers can implement measures to streamline the approval process for generic drugs, provide incentives for generic drug manufacturers, and ensure a level playing field for competition.
- Regulate drug prices directly: Governments can intervene to set price caps or maximum allowable price increases for drugs, particularly in markets with limited competition. For example, China's National Reform and Development Commission has regulated and reduced drug prices on numerous occasions.
- Improve transparency: Making drug prices and pricing methodologies public can help identify excessive pricing and hold manufacturers accountable. Transparency can also empower insurers and payers to negotiate lower prices and shift the balance of power in the market.
- Address market consolidation: Mergers and acquisitions among drug manufacturers can lead to increased market power and higher prices. Policymakers should carefully scrutinize such consolidations and take action to preserve market competition, including blocking mergers that would result in monopolies or significant reductions in competitors.
- Explore alternative payment systems: Prospective payment systems, such as those used in England (Payment by Results) and the US (Medicare), can provide incentives for cost control and efficient behaviour by linking payment directly to activity. However, it is important to consider the potential impact on the quality of care and access to treatments.
By implementing these strategies, policymakers can work towards curbing the escalation of drug prices and making healthcare more accessible and affordable for patients.
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Frequently asked questions
There are several reasons for price escalation in hospitals, including:
- The pursuit of profit and market domination by hospitals and drug manufacturers.
- Hospitals engaging in a "medical arms race", spending more on technologies and facilities to attract patients.
- Hospitals' ability to negotiate higher prices with payers due to consolidation through mergers and acquisitions.
- Lack of competition, allowing hospitals to charge higher prices without consequence.
- The fee-for-service (FFS) payment model, which incentivizes the over-provision of expensive health services.
Strategies to address price escalation in hospitals include:
- Regulating prices directly in concentrated provider markets.
- Increasing market competition by promoting the entry of new competitors or limiting the market power of existing providers.
- Using Medicare prices as a benchmark to gauge the reasonableness of commercial sector prices.
- Implementing prospective payment systems that relate payment directly to activity, removing hospitals' influence over pricing.
- Improving transparency around pricing to enable insurers and the public to identify and challenge high-priced providers.
Governments have a crucial role in regulating and controlling price escalation in hospitals. This includes:
- Investigating mergers and monitoring post-merger conduct to prevent anti-competitive practices.
- Challenging contract provisions that heighten the bargaining power of dominant healthcare systems.
- Proposing and implementing legislation to promote competition and regulate prices based on market structure.
- Regulating drug prices and developing essential drug lists to reduce the cost of medications.
- Increasing financial inputs into public health insurance schemes to improve access and reduce out-of-pocket expenses.
